Informational Annex prepared bt the IMF. A statement by the Executive Director for Fiji.

Transcription

1 February 1 REPUBLIC OF FIJI 11 ARTICLE IV CONSULTATION IMF Country Report No.1/44 Under Article IV of the IMF s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 11 Article IV consultation with Fiji, the following documents have been released and are included in this package: Staff Report for the 11 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on November 4, 11, with the officials of Fiji on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January, 1. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF. Informational Annex prepared bt the IMF. Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January, 1 discussion of the staff report that concluded the ArticleIV consultation. A statement by the Executive Director for Fiji. The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund Publication Services 7 19 th Street, N.W. Washington, D.C. 431 Telephone: () Telefax: () publications@imf.org Internet: International Monetary Fund Washington, D.C. 1 International Monetary Fund

2 REPUBLIC OF FIJI 11 ARTICLE IV REPORT REPUBLIC OF FIJI January, 1 STAFF REPORT FOR THE 11 ARTICLE IV CONSULTATION KEY ISSUES Fiji s economy expanded by about percent in 11 after several years of very low growth. Political uncertainty and slow structural reforms have suppressed potential growth, and this, coupled with fiscal stimulus during the global financial crisis, has pushed Fiji s public debt ratio to one of the highest levels in the region, leaving limited room to respond to future shocks. The economic outlook appears stable, but there are downside risks related to the political situation, structural weaknesses, and the global environment. Macroeconomic policies are broadly appropriate. The 1 budget has proposed much needed fiscal consolidation, though marginal income tax rate reductions will make it difficult to achieve deficit targets. Monetary policy is accommodative, given the currently benign inflation outlook, but continued vigilance against future inflationary pressure is critical, and credit growth targets should be avoided. The Fijian dollar is broadly in line with fundamentals, and the financial sector is well regulated and supervised, although the Fiji National Provident Fund requires reform. Structural reforms are key to boosting growth and sustainability. Policy changes regarding the land system, public enterprises, the sugar sector, exchange controls, pensions, and the civil service are in the right direction, and recent political developments should boost investor confidence, but rigorous implementation is essential for success. A significant reduction in price controls, more consultation in the policymaking process, including in handling labor relations, and continued resolution of political uncertainties, including establishment of a concrete plan leading up to the 14 election, will also be critical.

3 11 ARTICLE IV REPORT REPUBLIC OF FIJI Approved By Hoe Ee Khor and Claire Waysand Discussions took place in Suva during October 4 November 4, 11. The team comprised Koshy Mathai (head), Niamh Sheridan, Jade Vichyanond (all APD), and Yongzheng Yang (Resident Representative), as well as Lai Tora (ADB) and Lucy Pan (World Bank). The mission was joined by Ernando de Leon (OED) and coordinated with Matt Davies (PFTAC). CONTENTS CONTEXT 4 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 4 POLICY DISCUSSIONS 7 A. Macroeconomic Policies 7 B. Structural Policies 9 STAFF APPRAISAL 13 TABLES 1. Selected Economic Indicators, Monetary Accounts, A. Central Government Finances, B. Central Government Finances, Balance of Payments, Selected Medium-Term Indicators, FIGURES 1. Macroeconomic Developments 19. Exchange Rate and Inflation Developments 3. Fiscal Indicators 1 4. Balance of Payments. Monetary Indicators 3 6. Financial Soundness Indicators 4 7. External Vulnerabilities INTERNATIONAL MONETARY FUND

4 REPUBLIC OF FIJI 11 ARTICLE IV REPORT BOXES 1. Poverty in Fiji and Policy Responses 1. Exchange Rate Assessment Fiji National Provident Fund Land Reform 18 APPENDICES I. External Debt Sustainability Framework, II. Public Sector Debt Sustainability Framework, III. Progress on Structural Reforms and Future Plans 36 INTERNATIONAL MONETARY FUND 3

5 11 ARTICLE IV REPORT REPUBLIC OF FIJI CONTEXT 1. Fiji s economy is growing at a very. The political context is complex and slow pace, and that overshadows all other economic concerns. After averaging nearly ¾ percent during the 199s as well as the first five years of the new millennium, growth dropped to under ¼ percent over the last five years, and although urban poverty has declined, rural poverty remains stubbornly high (Box 1). In 1, while developing Asia roared ahead at 9½ percent growth, Fiji contracted by ¼ percent, worse even than other Pacific islands. And while growth should improve in 11 and beyond, it seems unlikely, given political and economic constraints, to substantially exceed percent unless structural reforms are accelerated. Against this presents challenges for the economy. The current government took power in a 6 coup, relations with traditional donors are strained, and FDI has dropped sharply, though emerging donors remain engaged and have provided assistance. Elections expected for 9 did not occur, but the government has subsequently announced plans for an election in 14 and provided an allocation in the 1 budget for electoral preparations. Consultations on a new constitution have just been announced for 1 and should be facilitated by the lifting of the emergency regulation placing restrictions on the media and on free assembly. background, policies to promote investment and growth are the focus of this year s Article IV consultation. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 3. After contracting for two years, the economy rebounded in 11. Annual growth could be about percent, broadly in line with the estimate of the Authorities Macroeconomic Committee, and by far the best result of the past five years. Agriculture contributes the lion s share, with sugarcane production rising sharply from last year s record low and other subsectors recovering from cyclone damage. 4. Medium-term prospects, however, appear to be relatively weak unless structural reforms can be accelerated. Growth should slow in 1, as the natural bounce-back from 9 1 fades, and while trend growth could improve modestly thereafter, reflecting the reforms that the authorities have already put in place, moving to a significantly higher level of potential 4 INTERNATIONAL MONETARY FUND

6 REPUBLIC OF FIJI 11 ARTICLE IV REPORT growth would require an improved business and political climate and a more aggressive structural-reform effort. While there are new mining and other projects on the horizon, some of these have not yet been confirmed and will take time to produce results.. Risks around the outlook are tilted to the downside. These relate to political uncertainties and structural weaknesses, but also the fragile global economy. While disruptions in world financial markets would have little direct impact on Fiji s financial system, the resulting global downturn could slow Fijian growth to some extent, mostly through declines in tourism, remittances, and foreign direct investment, though concomitant declines in oil and food prices would soften the blow for this commodity-importing island nation. Fiji also benefits from its close economic links with Australia, whose current growth is supported by idiosyncratic factors, such as a mining boom, which would be expected to be fairly resilient to a moderate global shock. Of course, in a real tail risk scenario, no economy would be unaffected, including those in the region, and Fiji could face a sharp downturn. 6. Inflation has risen sharply but should moderate soon. Headline inflation hovered around 1 percent y/y for several months in 11, driven by imported food and fuel prices as well as increases in the VAT, various administered prices, and an electricity tariff rate restructuring. There is little evidence of generalized price pressures, and core inflation remains moderate. Commodity prices are now falling, and the one-off factors will soon drop out. Inflation should start 1 at around 6 percent and fall toward 3½ percent over the medium term, reflecting the anemic growth outlook, projected small declines in oil prices, and tightly controlled public wages. 7. Monetary conditions are accommodative. The system is awash with liquidity on account of foreign exchange inflows, but credit growth has been slow, and banks loan-deposit ratio remains below 9 percent. While lending to the private sector is now rising at about 7 percent, the Reserve Bank of Fiji (RBF) is concerned that SMEs and other businesses are being shut out. After holding steady for six months, the RBF cut its policy rate in October by 1 basis points, to ½ percent. It is also considering an SME loan guarantee scheme, among other measures, to spur lending. 8. Higher commodity prices have contributed to weak external balances. Fiji s current account deficit is estimated at 1 percent of GDP in 11. Over the medium term, however, as remittances, tourism INTERNATIONAL MONETARY FUND

7 11 ARTICLE IV REPORT REPUBLIC OF FIJI receipts, and goods exports, including sugar, grow while oil imports flatten out and nonoil imports grow moderately, the current account deficit could narrow to around 8 percent of GDP, leaving the overall balance in a small surplus. Gross reserves thus should remain healthy, despite increased dividend repatriation and some offshoring of Fiji National Provident Fund (FNPF) investment. Econometric estimates suggest that the exchange rate is broadly in line with fundamentals (Box ). 9. The fiscal deficit is estimated to have widened to 3½ percent of GDP in 11 and projected to fall again in 1, reflecting trends in Fiji Sugar Corporation (FSC) restructuring costs. The authorities plan a substantial capital expenditure boost in 1, but the deficit is budgeted to fall to around percent of GDP on account of a reduction in FSC restructuring costs and a projected increase in revenues. Debt is currently above percent of GDP relatively high for a small economy vulnerable to shocks and the government also faces contingent liabilities exceeding 1 percent of GDP, as well as unfunded FNPF liabilities. The authorities planned fiscal trajectory, which would keep deficits at 1½ percent of GDP from 13 onward, would reduce the debt ratio steadily, but additional measures may be needed to achieve that trajectory. 1. The financial sector is stable, but FNPF finances are unsustainable over the long run. The banks are well capitalized, with low NPLs and adequate loan loss provisioning. 1 The finance-company and insurance sectors are stable, but the largest nonbank financial institution, the FNPF, is actuarially unsustainable: its current pension annuitization rates, which vary from 1 to percent for different pensioners, imply negative net cash flows by 3 and depleted assets by 6 (Box 3). Authorities Views 11. While agreeing that the economy faces challenges, the authorities had a more positive outlook than staff. They expect that structural reforms already in train would lift growth by around ½ percentage point on average above the staff s forecast over the medium term. More significantly, they saw the economy s potential growth rate at about percent, substantially above staff s estimate. In terms of inflation, the authorities expected a 1 As seen in Figure 6, NPLs are higher at Bank of South Pacific (BSP) than at other banks. This, however, is a legacy from the Colonial Group, which it bought in 9, and BSP is, in any case, one of the smaller banks in the system. 6 INTERNATIONAL MONETARY FUND

8 REPUBLIC OF FIJI 11 ARTICLE IV REPORT more rapid drop, with average inflation falling to 3½ percent by the end of 1, and POLICY DISCUSSIONS A. Macroeconomic Policies 1. The mission suggested a lower fiscal deficit path than the one proposed by the authorities. Balancing the need to strengthen the fiscal position against the need to support growth, the authorities said they planned to move from what was then expected to be a ½ percent of GDP deficit in 11 to 3 percent in 1, and then to reduce the deficit by ½ percent in 13 and again in 14, with the eventual aim of balancing the budget. Staff noted that: (i) this would imply a substantial widening of the underlying deficit, excluding FSC costs, in 1, which would be inappropriate given Fiji s high public debt; and (ii) the debt ratio would hardly improve over a five-year period. Staff suggested that structural reform, not fiscal stimulus, was needed to boost potential growth and that fiscal space should be retained to deal with potential shocks. 13. The 1 budget which came out after the mission contained the welcome news that the authorities plan additional consolidation. The authorities target the deficit at percent of GDP in 1 and 1½ percent from 13 onward, despite an flattening out at 3 percent thereafter. increase in capital expenditure, civil service wage increases ranging from 3 to 9 percent (following a multiyear wage freeze), and some tax policy changes, including: a cut in the corporate tax from 8 to percent; a substantial cut in personal income tax for most taxpayers, offset by a new levy of 3 percent or more on the highest earners; a broadening of the percent Hotel Turnover Tax to cover restaurant and other services; increases in the departure tax and tobacco and alcohol excises; and new levies on telecommunications, credit cards, insurance, and luxury cars. 14. While the budget is growthfriendly, the tax changes could threaten the revenue base and require compensating measures to ensure deficit targets are met. The increase in public investment and reduction in marginal tax rates are important measures that could boost competitiveness and support growth, but they entail a significant fiscal cost. That cost is partially INTERNATIONAL MONETARY FUND 7

9 11 ARTICLE IV REPORT REPUBLIC OF FIJI masked in 1 by a bringing forward of corporate tax collections from 13, as well as the fact that the rate cuts are felt for only part of the year. Starting in 13, however, staff project revenues to be markedly lower. The authorities revenue projections seem overly optimistic, and while there could be some underexecution of the capital budget, deficit targets would be difficult to achieve without further fiscal measures. 1. The mission urged that discretionary tax concessions be curbed. While import VAT is performing strongly this year, customs duties are not, even though they share the same tax base, reflecting the authorities discretion to grant customs concessions. Tightening the scope for discretionary concessions would make the system more transparent and create fiscal space for welltargeted investment incentives. While the authorities had no disagreement, the 1 budget unfortunately contained no steps in this direction. Base broadening for the VAT and income tax would also be desirable to offset the reduction in marginal rates. 16. Staff did not object to the RBF s accommodative monetary policy, given the benign inflation outlook, but questioned its likely effectiveness. While some businessmen reported tight bank lending standards, the banks noted a lack of good projects and argued that the investment climate, rather than the cost of funds, was the main constraint to credit growth. They also echoing a general finding in the region that transmission mechanisms are impaired said that their lending rates are not highly sensitive to the policy rate. The mission emphasized that the RBF should clearly communicate its intent to tighten policy should inflation pick up, a view that the RBF fully shared. The mission expressed concerns about the RBF s creditgrowth targets, which could lead to lower asset quality and distort lending decisions. And while the RBF is also contemplating an SME credit-guarantee facility, the mission cautioned that the international experience with such facilities has been spotty. The authorities shared these concerns but noted the need to support growth. 17. The mission recommended that exchange rate policy should be subject to periodic review and adjustment if necessary. The peg has served a useful role as a nominal anchor, but in light of the partnercountry inflation differential, its level should be reviewed regularly in order to prevent creeping overvaluation. This flexible approach will help avoid the need for large devaluations like that seen in 9. The mission emphasized that fiscal and monetary policy must be consistent 8 INTERNATIONAL MONETARY FUND

10 REPUBLIC OF FIJI 11 ARTICLE IV REPORT with the peg. The authorities agreed with these views. There was also some discussion of other options, including a trading band, for introducing more flexibility into exchange rate management. 18. There was agreement that the policy space to respond to a global downturn is limited. High government debt constrains the recourse to fiscal stimulus, while the weak transmission mechanism limits the usefulness of monetary easing. In an extreme scenario, however in which, for instance, leading regional economies slow dramatically, hurting Fijian tourism, exports, remittances, and FDI there would be scope for some fiscal stimulus. Depending on the shock, exchange rate adjustment could also be warranted. 19. The mission agreed with the authorities that the key financial-sector priority is reforming the FNPF. An adjustment in the pension annuitization rate is clearly needed to preserve the fund s sustainability. Some transitional mechanism, however, could be offered for those already in, or near, retirement. The authorities earlier plan to cut the rate from as high as percent to 9 percent is on hold, and the 1 budget announced that an actuarially sound pension rate, along with transitional arrangements, would be introduced on March 1, 1; no details, however, are available at this point. While not offering specific investment advice, staff endorsed the FNPF s efforts to rehabilitate its investment portfolio and diversify by investing abroad. B. Structural Policies. Removing structural impediments to growth is critically important. Many of the mission s interlocutors suggested that relaxing the emergency regulation and establishing a clear path toward a 14 election would be the key measures to boost investor confidence. In this context, the recent announcement that the emergency regulation would be lifted on January 7 so as to facilitate national consultations on a new constitution is most welcome. Interlocutors also expressed concerns about what they saw as ad hoc and sometimes inconsistent policymaking making decisions too frequently, without adequately consulting civil society, and without any lead time for implementation; changing these practices would also improve the business climate. Staff also noted the importance of several sector-specific reforms to unlock the economy s potential, welcomed the authorities efforts in these areas, and urged that further reforms be expedited. A strict Appendix III provides a summary of progress and plans regarding structural reforms. INTERNATIONAL MONETARY FUND 9

11 11 ARTICLE IV REPORT REPUBLIC OF FIJI prioritization of measures is difficult without more in-depth study, but the following assessment of the various reform measures provides a general sense. 1. Land reform is widely perceived to be among the most important structural measures to boost the economy. Making more productive use of the nation s lands has been a major, and appropriate, focus of the authorities reform efforts (Box 4). Maximum allowable lease tenures have been extended, and a Land Bank has recently been set up to better deploy the nation s assets. There is a complex bureaucracy responsible for different parts of land policy, and rationalizing its functions over time would be desirable. There have also been some complaints about inadequate consultation with native landowners, and addressing this could make the reforms more sustainable.. Price decontrol could also provide a fillip to investment and growth. Staff see the current system of price controls as overly extensive and as a deterrent to investment. Anticompetitive practices are not uncommon in a small economy, and given the difficulties in prosecuting such behavior, there may be a case for regulating prices of a few basic commodities, for the benefit of the poor. In Fiji, however, the Commerce Commission regulates 4 food items, 46 hardware items, 74 pharmaceuticals, utility rates, wholesale cement and steel, fuel, and rental properties. Maximum prices are tailored to each retailer s costs and updated as often as weekly. The criteria for entering and leaving the controlled list are unclear. The authorities noted that controls were a temporary solution and were being reduced. The mission felt that the authorities needed to tackle anticompetitive practices directly and scale back price controls faster, as such micromanagement distorts price signals, creates uncertainty, absorbs staff resources, gives vendors incentives to reduce product quality or not supply at all, and reduces incentives for investment. The pace of price decontrol would, however, need to be moderated somewhat to smooth the inflation path. 3. Sugar-sector reform, which is already underway, is another critical step. In 1, the government committed to reforming the industry and returning FSC to profitability. This included assuming FSC debt and taking full ownership and control of the company. The Task Force has now laid out a comprehensive strategy (addressing farm productivity, mill efficiency, and pricing strategy) to turn around the sugar sector which, though it now contributes only two percent of GDP, still supports a large 1 INTERNATIONAL MONETARY FUND

12 REPUBLIC OF FIJI 11 ARTICLE IV REPORT proportion of Fiji s population. The strategy is sensible and could help the industry survive in a post-preferential-price era, but the option of privatization could also be considered. 4. Staff noted that an improved environment for labor relations could have broad-ranging positive impacts on the economy. The recent Essential National Industries Decree, which cancelled existing labor agreements in several sectors, has strained labor relations and sparked boycott threats from Australian unions. The mission expressed concern that the resulting situation could lead to a perception of a worsening investment climate and a fall-off in demand facing some of Fiji s key industries. The authorities argued that the decree was needed to resolve some outdated and anomalous agreements that were hampering productivity and dampening growth.. Civil service reform is in train, but more remains to be done. Wages have been increased between 3 and 9 percent in the 1 budget following a freeze lasting more than five years; there is also a hiring freeze with limited exceptions. Some payroll and establishment-control reforms are needed. The authorities have tried to outsource certain functions, with mixed results. There is a need to attract and retain more senior talent, so as to improve the civil service s ability to handle hoped-for land transactions and investment applications. Many of these goals and measures appear sensible but need to be part of a comprehensive strategy that has widespread buy-in. The authorities agreed with this assessment. 6. Staff applauded the government s extensive reform plans for public enterprises but urged that the pace of implementation be accelerated. Many enterprises are slated for divestment, corporatization, or some other type of reform, with the emphasis being on improving services many of which are enjoyed by the poor and reducing fiscal costs. Implementation, however, has been slow, and the SOEs, which still face a soft budget constraint, continue to generate very low returns. The authorities agreed that SOE reforms were critical. 7. The government s emphasis on building infrastructure throughout Fiji seems well placed and should continue. The mission heard very positive comments on the acceleration of public-sector investment in infrastructure, which would clearly enhance productivity and help boost economic growth. 8. Further exchange control liberalization would also be desirable. INTERNATIONAL MONETARY FUND 11

13 11 ARTICLE IV REPORT REPUBLIC OF FIJI Despite streamlining, some investor uncertainty lingers. Banks have recently been allowed net forward contracts of up to F$ million, and individuals can take out up to F$1, for overseas investment. Banks reported that restrictions on dividend repatriation seem to be less binding than before (partly because much of the stock of earlier-year profits has already been remitted), and the 1 budget has increased delegated limits, expanding banks authority to conduct various transactions without RBF approval. 3 Capital transactions are still allowed only if the Fiji Revenue and Customs Authority (FRCA) issues a tax clearance, which is sometimes delayed. Trade transactions are always approved. The authorities agreed that exchange control liberalization was desirable and said that it would continue, especially now that RBF reserves are healthy. seen in 6-7. Investment and growth rise substantially in 13, the current account balance improves markedly in the outer years (once mining production starts), reserves build up, and the debt ratio falls. Inflation, however, rises temporarily, before potential growth picks up. The authorities found this to be a useful exercise. 9. The mission constructed an upside scenario to illustrate the possible benefits of a more aggressive pace of reforms. This scenario assumes that the improved investment climate leads to an investment boom realization of all the mining and other projects currently in the pipeline, plus an increase in tourism investment on the scale 3 Staff are in the process of following up with the authorities to assess whether these or any other measures have jurisdictional implications. 1 INTERNATIONAL MONETARY FUND

14 REPUBLIC OF FIJI 11 ARTICLE IV REPORT STAFF APPRAISAL 3. Fiji s macroeconomic policies are generally appropriate. The planned deficit path should help lower the public debt ratio, though the costs of tax rate reductions are likely to exceed estimates in the budget, and more fiscal effort will be needed if deficit targets are to be achieved. Discretionary tax concessions also need to be curbed. Against a benign inflation outlook, the authorities attempt to boost growth by easing monetary policy is understandable, although attempts to force matters through credit growth targets are undesirable. The exchange rate is broadly in line with fundamentals but should be reviewed and adjusted more frequently to avoid the need for big step devaluations. There is little policy space to respond to a global downturn, but in an extreme scenario, fiscal stimulus and possibly an exchange rate adjustment could be considered. The financial sector is stable, and the authorities are appropriately focused on FNPF reform. 31. Growth outcomes have been, and may remain, disappointing. While it may not be realistic for a Pacific island country, hampered by a remote location and a small population, to strive for growth rates seen in large emerging markets, Fiji s performance with growth averaging under ¼ percent since 7 has been particularly dismal. And while urban poverty has declined significantly, rural poverty has scarcely moved. Boosting growth should be, and indeed is, policymakers top priority. 3. Improving the investment climate is a key ingredient in raising economic growth. The current political environment has chilled relations with some development partners and introduced uncertainty for both domestic and foreign investors. The announced lifting of the emergency regulation on January 7 and plans for national consultations in 1 on a new constitution are positive steps that will give comfort to investors, as will other concrete steps toward the promised 14 election, going beyond the welcome electoral allocation in the 1 budget. A more consultative approach to policymaking would also foster more confidence. 33. The authorities are pursuing appropriate structural reforms, but faster progress is needed. The establishment and operation of the Land Bank is a promising step in facilitating development of idle lands, but landowner consultation needs to be improved. The sugar sector reform strategy is welcome, but steadfast implementation is now needed. Civil service reform must continue, to reduce costs and, especially, to increase the effectiveness of service delivery. Government plans to reform and INTERNATIONAL MONETARY FUND 13

15 11 ARTICLE IV REPORT REPUBLIC OF FIJI restructure loss-making state enterprises should be carried out without delay. 34. Price controls are pernicious and should be scaled back sharply. The current regime is excessive and likely to deter investment. Price fixing and other anticompetitive behaviors should be monitored directly and punished appropriately without resorting to crude price restrictions that hobble one of the key signals in a market economy. 3. A number of exchange restrictions are subject to Fund approval under Article VIII. Restrictions arise from tax certification requirements before foreign companies can remit profits, and direct limits on large payments. These should be eliminated. While staff sympathize with the desire to promote tax compliance, exchange restrictions are not the appropriate means to this end, as they weaken the business climate and dampen foreign investment. 36. It is recommended that the next Article IV consultation take place on the standard 1-month cycle. 14 INTERNATIONAL MONETARY FUND

16 REPUBLIC OF FIJI 11 ARTICLE IV REPORT Box 1. Poverty in Fiji and Policy Responses Expenditure-based poverty estimates suggest that 3 percent of the Fijian population with substantial variation across the different divisions and provinces lived in poverty in 8/9, down from 4 percent in /3. While there has been considerable improvement in urban areas, rural areas have shown none. Poverty Incidence across the Urban and Rural Areas, These observed trends are consistent with known patterns of economic growth, including, in particular, the decline in agriculture output over the last few years. Most of the decline in poverty came from the growth of non-agricultural sectors in urban areas. It also appears that rural-urban migration contributed. Poverty in Fiji is correlated with factors including old age, the number of children, and the education and employment status of household heads. Government spending on social assistance is quite small, at around ½ percent of GDP, and Source: World Bank estimates using /3 and 8/9 HIES its impact on poverty at the national level is thus limited. Eligibility criteria for targeted social assistance need to be more clearly defined, and access to the Family Assistance Program should be widened while targeting the extremely poor. An increase in the social assistance budget would be desirable, but transfer programs are just one instrument in a multipronged approach to reducing poverty Urban Rural Total /3 8/9 INTERNATIONAL MONETARY FUND 1

17 11 ARTICLE IV REPORT REPUBLIC OF FIJI Box. Exchange Rate Assessment Staff estimates suggest that the Fiji dollar is broadly in line with fundamentals. The three standard methods show overvaluation ranging from 1 to 6 percent. Qualitatively, these results are consistent with staff s baseline projection of stable reserves coverage over the medium term. Under the MB approach, the current account deficit norm is estimated at 6¾ percent of GDP, based on demographic factors, relative income growth, and the oil trade balance. The projected current account deficit lies slightly above this norm, and assuming a semi-elasticity of -.3, it is estimated that a 4½ percent real depreciation would be sufficient to bring the projection in line with the norm. The ERER estimates are broadly in line with the MB approach. The model explains the Exchange Rate Assessment 1/ CA/GDP REER Norm Proj. / Overvaluation MB approach 3/ Current account balance (CAB) ERER approach 4/ 6. ES approach / NFA stabilizing CAB / All results are expressed in percent. / Staff projection of the underlying CA/GDP in 16. 3/ Based on a semi-elasticity of the CA/GDP with respect to the REER of -.3 4/ Overvaluation is assessed relative to October 11. / Current account deficit that stabilizes net foreign liabilities, estimated at 1 percent of GDP in 16. REER largely on the basis of the tourism-based terms of trade (i.e., using average expenditure per tourist as a price proxy for this key export). Assuming a slight improvement in the terms of trade over the medium term (with tourist spending flat, and import prices declining as per the WEO), the exchange rate is estimated to be 6 percent overvalued. The ES approach implies that the exchange rate is roughly in equilibrium, assuming nominal GDP growth of just over 7 percent on average over the medium term and stabilization of net foreign liabilities (NFL) at 1 percent of GDP Fiji: ERER Approach 14 1 Gross Official Reserves (In months of retained GNFS imports) Actual 8 Equilibrium Terms of trade INTERNATIONAL MONETARY FUND

18 REPUBLIC OF FIJI 11 ARTICLE IV REPORT Box 3. Fiji National Provident Fund FNPF is a public pension fund in which formal-sector employees are required to participate. Member contributions are retained in individual accounts and pooled for investment purposes. Members can make pre-retirement withdrawals for specified purposes, and upon retirement at, they have the choice between a lump-sum and a lifetime annuity. FNPF suffers from a substantial actuarial imbalance on account of high annuitization rates (from 1 to percent). These large Summary of Key Indicators annuities imply that pensioners exhaust their savings before death, and FNPF must fill the gap using the Pension Buffer Fund, which relies on current members contributions but is being depleted rapidly. According to the 1 budget, a new agebased, pension rate will be implemented in March Source: FNPF 1 Annual Report 1. FY6* FY7 FY8 FY9 FY1 Investment Portfolio ($ billions) Interest rate credited to Members 6.% 6.3% 6.%.%.% Interest paid to members ($ millions) Employers Membership 331, 343,43 3,38 37,66 364,717 Contributions ($ millions) Members Funds ($ billions) Investment Income ($ millions) Total Assets ($ billions) Withdrawals ($ millions) The FNPF s investment portfolio would also benefit more from greater diversification and more profitable investments. Fiji government securities account for nearly two-thirds of the portfolio, and there are substantial FNPF Investments - Dec 1 Tourism related building & restrictions on overseas investments. Funds construction not in government bonds have in the past 14% Fiji often been funneled into low-yielding Government domestic tourism and real estate projects. Housing % 66% FNPF is currently aiming to boost profits by Statutory Bodies & Local increasing its offshore investments to or Authorities 3 percent of the portfolio. 16% Housing Authority % * FY is July 1 to June 3 Given the fund s size (approximately 6 percent of GDP), FNPF has implications for the conduct of monetary policy, by keeping Treasury yields down and by depositing in banks and lending substantially to the private sector and quasi-government agencies. INTERNATIONAL MONETARY FUND 17

19 11 ARTICLE IV REPORT REPUBLIC OF FIJI Box 4. Land Reform Eighty-eight percent of land in Fiji is native land, owned by tribal groups; another eight percent is individually owned; and the remaining four percent is state land. Native land cannot be sold but can be leased with the landowners consent. The itaukei Land Trust Board (TLTB) handles such transactions and sets rents typically ½ to 3 percent of the land s unimproved capital value (UCV), and no more than 6 percent by law. Obtaining a TLTB lease is fairly cumbersome, and much native land has sat idle. Seeking to deploy land more effectively, the government in 1 established a Land Use Unit which essentially competes with TLTB. The Unit operates a Land Bank in which native landowners (as well as the Government for state land) can voluntarily register land for the Unit to administer. Once the land has been transferred from TLTB to the Land Bank, the Unit must survey and value the land and advertise its availability. The Land Bank offers native landowners more beneficial terms than TLTB, including a higher rental rate (up to 1 percent of UCV, and no diversion of 1 percent of the rent to the tribal chief, as is the case with TLTB) and longer lease periods (up to 99 years for any type of land, versus a maximum of 3 years for TLTB s agricultural land). So far, seven tracts of land have been registered with the Unit, exceeding the 11 target of, hectares, a further 11, hectares have been volunteered for registration, and one lease has been issued, to a Chinese company pursuing bauxite mining. Although this is still a very small portion of total native land, it represents a positive start and appears also to have pushed TLTB to improve its competitiveness. Going forward, institutional capacity at the Unit must be strengthened, and more consultation with native landowners will be necessary to ensure their buy-in and thus the reform s sustainability. In due course, some rationalization of the multiple bureaucracies handling land issues would also be desirable. 18 INTERNATIONAL MONETARY FUND

20 REPUBLIC OF FIJI 11 ARTICLE IV REPORT Figure 1. Fiji: Macroeconomic Developments Fiji s growth has slowed substantially Real GDP Growth (In percent) 1 and per capita GDP has stagnated for more than a decade. Growth in Real GDP per Capita, / (In percent) Average growth Average growth Sources: Fiji authorities; and IMF staff calculations. FSM PNG Fiji TON VUT PIC / KIR CARIB WSM IO 3/ Sources: World Economic Outlook database; and Fund staff calculations. 1/ Geometric average. / Average for PIC countries included in chart. 3/ Indian Ocean: Mauritius, Seychelles, and Maldives. Investment remains low by international standards. Sugar production is in steady decline. Investment, / (In percent of GDP) Solomon Islands Papua New Guinea Fiji Caribbean Indian Ocean / Fiji: Sugar Production 1 Sugar as a percent of GDP (LHS) 9 Yield per tonne of sugar cane (RHS) 8 Average production (tonne per hectare, RHS) Sources: World Economic Outlook database; and Fund staff calculations. 1/ Simple average. / Indian Ocean: Mauritius, Seychelles, and Maldives Source: Fiji Islands Bureau of Statistics. While production is relatively diversified... exports are less so. Fiji: Composition of GDP, 1 Agriculture, forestry & fishing 1/ Sugar 19% Mining & quarrying; electricity, water & gas; and construction Manufacturing 1/ 16% 11% % % 14% Fiji: Composition of Exports of Goods and Nonfactor % Services, 1 (Excluding re-exports) 7% Sugar Other goods 1/ 33% Trade, hotels & cafes Mineral water Transport & communications Finance, insurance, real estate & business services Other 16% 17% Tourism, credit Other service credit 34% 4% Sources: Fiji authorities; and IMF staff calculations. 1/ Excluding sugar. Sources: Fiji authorities; and IMF staff calculations. 1/ Fish, garments, gold, timber, and others. INTERNATIONAL MONETARY FUND 19

21 11 ARTICLE IV REPORT REPUBLIC OF FIJI Figure. Fiji: Exchange Rate and Inflation Developments The April 9 devaluation resulted in significant competitiveness gains, but the REER has since appreciated. Fiji: Effective Exchange Rates 9 Real effective exchange rate Nominal effective exchange rate In nominal terms, the Fiji dollar has appreciated against the US dollar but depreciated against the Australian dollar. Fiji: Nominal Exchange Rates National currency per US dollar National currency per AUS dollar Sources: IMF Information Notice System; and IMF staff estimates. Sources: Reserve Bank of Fiji; and IMF staff estimates Headline inflation has increased recently Fiji: Headline and Core Inflation (Year-on-year percentage change) Core (excl. Food, heating & lighting, and transport.) Headline - - Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Sources: Fiji Islands Bureau of Statistics; and IMF staff calculations. But the increase in inflation has been driven by commodity prices Fiji: Transportation Costs (Year-on-year percentage change) 4 Fiji (LHS) 1 World Oil Prices, percentage change, US$ per barrel (RHS) Jan-6 Sep-6 May-7 Jan-8 Sep-8 May-9 Jan-1 Sep-1 May-11 Sources: World Economic Outlook database; and IMF staff calculations and is now relatively high in international comparison. CPI Headline Inflation (Average 7-11) VUT CARIB WSM TON KIR PIC FJI PNG SLB IO 1/ 1/ 3/ 1/ Simple average. / Average for PIC countries included in chart. 3/ Indian Ocean: Mauritius, Seychelles, and Maldives. Fiji:Food Prices (Year-on-year percentage change) 1 1 Fiji (LHS) especially food prices. World Commodity Food Price (RHS) - -4 Jan-6 Sep-6 May-7 Jan-8 Sep-8 May-9 Jan-1 Sep-1 May-11 Sources: World Economic Outlook database; and IMF staff calculations INTERNATIONAL MONETARY FUND

22 REPUBLIC OF FIJI 11 ARTICLE IV REPORT Figure 3. Fiji: Fiscal Indicators Revenues and expenditures have been stable and lower than in most comparator countries. Expenditure (In percent of GDP) 3 Expenditure and net lending Revenue and grants Sources: Reserve Bank of Fiji; and IMF staff calculations Fiji has generally run overall and primary deficits Fiscal Balances (In percent of GDP) 4 3 Overall balance Primary balance Sources: Fiji authorities; and IMF staff estimates Revenue and Expenditure, 1 (In percent of GDP) Expenditure and net lending FJI IO 1/ 3/ CARIB 1/ Revenue and grants PNG WSM PLW PIC 1/ / 1/ Simple average. / Average for PIC countries included in chart. 3/ Indian Ocean: Mauritius, Seychelles, and Maldives TON MHL KIR though its performance is not out of line with that of comparators. Fiscal Balance (In percent of GDP) TON KIR WSM FJI VUT MHL PNG SLB Source: IMF APDLISC database Central Government Debt (In percent of GDP) 7 External debt 6 Domestic debt Public debt is mostly domestic Sources: Fiji authorities; and IMF staff estimates and is high by regional standards. Public Debt, 11 (In percent of GDP) VUT PNG SLB FSM PIC 1/ TON FJI WSM IO 1/ / 3/ 1/ Simple average. / Average for PIC countries included in chart. 3/ Indian Ocean: Mauritius, Seychelles, and Maldives. ; CARIB 1/ INTERNATIONAL MONETARY FUND 1

23 11 ARTICLE IV REPORT REPUBLIC OF FIJI Figure 4. Fiji: Balance of Payments Fiji: Exports (In percent of GDP Exports increased in 1 and 11. Other (total less sugar & re-exports) Re-exports Sugar 3 3 Fuel Non-fuel Food, tobacco & beverages as did imports Fiji: Imports, excluding re-exports (In percent of GDP) Sources: Fiji authorities; and IMF staff estimates Sources: Fiji authorities; and IMF staff estimates....and the trade deficit remains stable. Fiji: Trade Balance and Current Account (In percent of GDP) Other key components of the current account have also been stable Workers' Remittances and Tourism Credit (In percent of GDP) Current account balance -3 Trade balance Sources: Fiji authorities; and IMF staff estimates Workers' Remittances Tourism credit Sources: Reserve Bank of Fiji; and IMF staff calculations FDI has dropped sharply since the 6 coup... while reserves have improved, partly reflecting the 9 devaluation and other capital account flows. Fiji: Foreign Direct Investment (In percent of GDP) Sources: Fiji authorities; and IMF staff estimates Fiji: Gross Official Reserves (In millions of U.S. dollars) Gross official reserves 1/ In months of retained GNFS imports Sources: Reserve Bank of Fiji; and IMF staff estimates. 1/ Reserve Bank of Fiji holdings only INTERNATIONAL MONETARY FUND

24 REPUBLIC OF FIJI 11 ARTICLE IV REPORT Figure. Fiji: Monetary Indicators Money growth and inflation have both picked up. Money and Inflation (Year-on-year percentage change) Currency CPI M -1-1 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Source: Reserve Bank of Fiji. given moderate private-sector loan growth. Loans (Year-on-year percentage change) Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Source: Reserve Bank of Fiji. though deposit rates have been more responsive. Interest Rates 16 1-year govt. bonds (LHS) 14 Time deposit rate (LHS) Savings deposit rate (RHS) Wholesale, retail, hotels, and restaurants Total loans Housing.4 Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Source: Reserve Bank of Fiji High banking-system liquidity has just started to decline... Reserves and Loans Excess reserves to deposit ratio Loan to deposit ratio (RHS) 6 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Source: Reserve Bank of Fiji Bank lending rates have been flat despite policy rate cuts... Interest Rates 1 Banks weighted-average lending rate RBF minimum lending rate Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Source: Reserve Bank of Fiji. The FNPF remains the largest holder of government securities. Outstanding Goverment Securities by Holder (In millions of Fiji dollars) Reserve Bank of Fiji Commercial banks FNPF Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Source: Reserve Bank of Fiji INTERNATIONAL MONETARY FUND 3

25 11 ARTICLE IV REPORT REPUBLIC OF FIJI Figure 6. Fiji: Financial Soundness Indicators Commercial bank assets have risen to 7 percent of GDP. Commercial Bank Assets (In percent of GDP) Sources: Reserve Bank of Fiji; and IMF staff calculations Two Australian-owned branches (ANZ and Westpac) make up more than 7 percent of total bank assets. Size: Share in Total Assets, 1 1/ (As a percent of total commercial bank assets) ANZ Westpac BSP Bank of Baroda Sources: Reserve Bank of Fiji; and IMF staff calculations. 1/ Twelve months up to September for ANZ and Westpac, up to June for BSP, and up to March for Bank of Baroda Capital adequacy appears to be relatively high and improving Total Capital Adequacy 1/ (As a percent of total risk-weighted exposures) 3 ANZ Westpac 1 BSP Bank of Baroda Source: Reserve Bank of Fiji. 1/ Twelve months up to September for ANZ and Westpac, up to June for BSP, and up to March for Bank of Baroda. Asset quality at three of the four banks is generally adequate Nonperforming Loans 1/ (As a percent of total assets) ANZ BSP Westpac Bank of Baroda Profitability 1/ (As a precent of average total assets) ANZ BSP and profits remain healthy. Westpac Bank of Baroda Source: Reserve Bank of Fiji. 1/ Twelve months up to September for ANZ and Westpac, up to June for BSP, and up to March for Bank of Baroda. and while provisioning seems sufficient, it has been declining. Total Provisions 1/ (As a percent of impaired assets) ANZ BSP Westpac Bank of Baroda Source: Reserve Bank of Fiji. 1/ Twelve months up to September for ANZ and Westpac, up to June for BSP, and up to March for Bank of Baroda Source: Reserve Bank of Fiji. 1/ Twelve months up to September for ANZ and Westpac, up to June for BSP, and up to March for Bank of Baroda. 4 INTERNATIONAL MONETARY FUND

26 REPUBLIC OF FIJI 11 ARTICLE IV REPORT Figure 7. Fiji: External Vulnerabilities The current account deficit is moderate Current Account Balance, 11 (In percent of GDP) and reserve coverage adequate Gross Official Reserves (In months of next year's imports of goods and nonfactor services) (proj) PNG FSM SLB PIC 1/ / WSM FJI TON MHL CARIB 1/ 1/ Simple average. / Average for PIC countries included in chart. 3/ Indian Ocean: Mauritius, Seychelles, and Maldives. VUT IO 1/ 3/ - 1 Fiji Tonga Samoa Papua New Guinea Source: IMF APDLISC database but oil demand is substantial and inelastic Fiji: Oil Imports 1 9 Oil Volume, excluding re-exports 8 Imports: Oil price (US$) 1/ (RHS) and exports remain poorly diversified, despite some recent improvement. Fiji: Sugar Exports and Tourism Receipts (As a percent of total exports) 6 Tourism Receipts Sugar exports Sources: Global Assumptions Database; and IMF staff calculations. 1/ Crude Oil (petroleum), simple average of three spot prices: Dated Brent, West Texas Intermediate, and the Dubai Fateh, U.S. dollars per barrel Sources: Reserve Bank of Fiji; and IMF staff calculations. External public debt is lower than in other Pacific Island countries but Fiji faces a large external bond payment in 16. External Debt, 11 (In percent of GDP) ; IO 1/ 3/ SLB PNG FJI PIC 1/ / CARIB 1/ KIR TON 1/ Simple average. / Average for PIC countries included in chart. 3/ Indian Ocean: Mauritius, Seychelles, and Maldives Fiji: External Payments 1/ (in percent of exports) Interest payments Amortization payments Source: Fiji Islands Bureau of Statistics. 1/ Exports of goods, f.o.b., and nonfactor services INTERNATIONAL MONETARY FUND